5. Janet Ludlow is preparing a report on U.S.-based manufacturers in the electric toothbrush industry and has gathered the information shown in Tables 17A and 17B . Ludlow’s report concludes that the electric toothbrush industry is in the maturity (i.e., late) phase of its industry life cycle.

a. Select and justify three factors from Table 17A that support Ludlow’s conclusion.

b. Select and justify three factors from Table 17B that refute Ludlow’s conclusion.

6. As a securities analyst you have been asked to review a valuation of a closely held business, Wigwam Autoparts Heaven, Inc. (WAH), prepared by the Red Rocks Group (RRG). You are to give an opinion on the valuation and to support your opinion by analyzing each part of the valuation.

WAH’s sole business is automotive parts retailing. The RRG valuation includes a section called

“Analysis of the Retail Autoparts Industry,” based completely on the data in Table 17C and the following additional information:

• WAH and its principal competitors each operated more than 150 stores at year-end 2006.

• The average number of stores operated per company engaged in the retail autoparts industry is 5.3.

• The major customer base for autoparts sold in retail stores consists of young owners of old vehicles. These owners do their own automotive maintenance out of economic necessity.

TABLE 17A 2001 2002 2003 2004 2005 2006 Return on equity Electric toothbrush industry index 12.5% 12.0% 15.4% 19.6% 21.6% 21.6%
Market index 10.2 12.4 14.6 19.9 20.4 21.2 Average P/E Electric toothbrush industry index 28.5 23.2 19.6 18.7 18.5 16.2
Market index 10.2 12.4 14.6 19.9 18.1 19.1 Dividend payout ratio Electric toothbrush industry index 8.8% 8.0% 12.1% 12.1% 14.3% 17.1%
Market index 39.2 40.1 38.6 43.7 41.8 39.1 Average dividend yield Electric toothbrush industry index 0.3% 0.3% 0.6% 0.7% 0.8% 1.0%
Market index 3.8 3.2 2.6 2.2 2.3 2.1

a. One of RRG’s conclusions is that the retail autoparts industry as a whole is in the maturity stage of the industry life cycle. Discuss three relevant items of data from Table 17C that support this conclusion.

b. Another RRG conclusion is that WAH and its principal competitors are in the consolidation stage of their life cycle.
i. Cite three relevant items of data from Table 17C that support this conclusion.
ii. Explain how WAH and its principal competitors can be in a consolidation stage while their industry as a whole is in the maturity stage.

TABLE 17B

• Industry Sales Growth—Industry sales have grown at 15–20% per year in recent years and are expected to grow at 10–15% per year over the next 3 years.
• Non-U.S. Markets—Some U.S. manufacturers are attempting to enter fast-growing non-U.S. markets, which remain largely unexploited.
• Mail Order Sales—Some manufacturers have created a new niche in the industry by selling electric toothbrushes directly to customers through mail order. Sales for this industry segment are growing at 40% per year.
• U.S. Market Penetration—The current penetration rate in the United States is 60% of households and will be difficult to increase.
• Price Competition—Manufacturers compete fiercely on the basis of price, and price wars within the industry are common.
• Niche Markets—Some manufacturers are able to develop new, unexploited niche markets in the United States based on company reputation, quality, and service.
• Industry Consolidation—Several manufacturers have recently merged, and it is expected that consolidation in the Industry will increase.
• New Entrants—New manufacturers continue to enter the market.

TABLE 17C 2006 2005 2004 2003 2002 2001 2000 1999 1998 1997 Population 18–29 years old (percentage change) 1.8% 2.0% 2.1% 1.4% 0.8% 0.9% 1.1% 0.9% 0.7% 0.3%
Number of households with income more than $35,000 (percentage change) 6.0% 4.0% 8.0% 4.5% 2.7% 3.1% 1.6% 3.6% 4.2% 2.2%
Number of households with income less than $35,000 (percentage change) 3.0% 1.0% 4.9% 2.3% 1.4% 2.5% 1.4% 1.3% 0.6% 0.1%
Number of cars 5–15 years old (percentage change) 0.9% 1.3% 6.0% 1.9% 3.3% 2.4% 2.3% 2.2% 8.0% 1.6%
Automotive aftermarket industry retail sales (percentage change) 5.7% 1.9% 3.1% 3.7% 4.3% 2.6% 1.3% 0.2% 3.7% 2.4%
Consumer expenditures on automotive parts and accessories (percentage change) 2.4% 1.8% 2.1% 6.5% 3.6% 9.2% 1.3% 6.2% 6.7% 6.5%
Sales growth of retail autoparts companies with 100 or more stores 17.0% 16.0% 16.5% 14.0% 15.5% 16.8% 12.0% 15.7% 19.0% 16.0%
Market share of retail autoparts companies with 100 or more stores 19.0% 18.5% 18.3% 18.1% 17.0% 17.2% 17.0% 16.9% 15.0% 14.0%
Average operating margin of retail autoparts companies with 100 or more stores 12.0% 11.8% 11.2% 11.5% 10.6% 10.6% 10.0% 10.4% 9.8% 9.0%
Average operating margin of all retail autoparts companies 5.5% 5.7% 5.6% 5.8% 6.0% 6.5% 7.0% 7.2% 7.1% 7.2%